Right Ways to Mortgage: Keep Your Payments Low

Just because a banker says you can afford something doesn’t mean that you can actually afford it.

When you go to apply for a mortgage to buy a house, your lender is going to ask you some questions about your financial life, plug some numbers into his computer, and then tell you how big a loan you qualify for. You’ll probably be surprised how big that number is, but don’t let him fool you. He’s getting a commission based on how big a loan he sells, so it’s in his best interest to get you into a monster mortgage. It’s in your best interest, however, to make sure that your monthly mortgage payment fits comfortably into your budget.

In this series, we’ve been discussing the ways to make sure that our home mortgages aren’t dragging us into dangerous and costly debt. Among the strategies that we’ve talked about using large down-payments, taking out only fixed-rate loans, and borrowing on 15-year terms. These methods help us to avoid mortgage pitfalls. But there’s still one major danger to steer clear of — borrowing so much money that our monthly payments are too big for our budgets.

All too often, people go to see a mortgage lender without having a good idea of what they should be spending on their monthly mortgage payments. (This usually has to do with the fact that they’re not living according to a good budget.) They let the lender tell them how large a loan they qualify for. Then they borrow that full amount, buy the biggest house they can with it, and spend the next thirty years paying a large percentage of their income to the bank in order to stay current on the mortgage.

What’s the problem with this? Well, using too much of your income to pay for your house leaves you unable to do other things with your money. We often refer to this condition as being “house-poor” — you’ve spent so much money on your fancy home that you aren’t able to afford other things that you really need.

It’s easy to get suckered into big mortgages with big monthly payments. After all, housing is almost always the greatest single expense in your family’s monthly budget. Compared to the cost of renting or owning a home, things like feeding ourselves, buying clothes or keeping the utilities on seem like small expenses. And they are small when you look at them one by one. But when you look at all of your life expenses as a whole, they can add up to much, much more than the cost of your monthly mortgage payment. When you account for all of the annual, semi-regular or one-time expenses that come up over the course of life, you begin to realize that you have much, much more to pay for besides your home.

What this means is that our mortgage payments shouldn’t represent too large a portion of our monthly expenditures. It would be tempting to think that you could spend 50% of your income every month on your mortgage. Many people do. But that leaves those people spread dangerously thin. They may have enough money left over to buy clothes, food and utilities, but they often don’t have enough to build an emergency fund, to save money for their next car purchases or to be generous givers. Often, this leads to a lifetime of bondage to consumer debt.

So, how much of your budget should a mortgage payment represent? That’s going to depend a lot on your particular financial situation. Some financial teachers recommend that you keep your payments to 25% of your monthly take-home pay. Depending on your life circumstances, you may be able to safely go up to 35%. But beyond that, things begin to get risky.

These numbers may sound conservative, and they are. But there’s a point to all of this: Being conservative with our home loans allows us to be liberal with our giving. Having small house payments allows us to invest for a big future. Most importantly, manageable house payments free us from the stress of constantly struggling to make ends meet. If you exercise caution in the size of your mortgage, you’re not going to have the biggest house on the block. What you will have, though, is financial peace.

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Photo by Edward Corpuz. Used under Creative Commons License.